Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

The Government is doing everything it can?

Tempting as it is to follow up yesterday’s post with some thoughts about how one might assess the Reserve Bank’s performance over recent years, I’m totally tied up today dealing with some rather older Reserve Bank issues. I’m preparing for a meeting tomorrow surrounded by various old documents, a number of legal opinions, and numerous rulings from the Court of Appeal, the House of Lords etc all bearing on some important, but complex, questions about events from 25 years ago. The investigative process has, unfortunately, already thrown up one explicit breach of the law – responsibility for which falls ultimately on the then Governor.

But before plunging back into that, I wanted to comment very briefly on a story Bernard Hickey ran yesterday on Auckland house prices. The headline says “PM says government doing everything it can on Auckland prices”, and from the quotes in the body of the article it doesn’t seem to be an unrepresentative headline. The quote that really caught my eye was this one

Asked if NZ$918,000 was too high, he said: “Well clearly it’s a lot but, there’s a big range and you can go on TradeMe and look at homes under $400,000 in Auckland and there are some.”

The blithe indifference was almost breathtaking. Median house prices in Auckland are closing in on 10 times median income, and the Prime Minister can’t even say prices are too high. He is reduced to suggesting that if you look hard enough you can find a few under $400000.

Those absolute bottom-end houses would still be more than five times median household income in Auckland. A reasonable benchmark for median house prices is around three times income – about a third of the current ratio in Auckland. I’ve never been one of those to criticise the Prime Minister for his wealth, but when he makes comments like this it does come across as someone who has got rather out of touch with the plight of ordinary New Zealanders (especially the younger, poorer, browner ones), perhaps reinforced by two weeks swanning round Europe attending rugby games at the taxpayer’s expense.

The Prime Minister is also reported as claiming that “There is an unprecedented level of construction and consenting now taking place in Auckland”.

I’m not sure quite what he has in mind. His claim took me by surprise, so I went to Infoshare and dig out the quarterly data on the number of residential building consents in Auckland. The latest consents numbers are barely at the peak of the 1990s boom, let alone the 2000s one. Auckland’s population is much larger than it was back then.

Different experts in planning and parliamentary vote-counting might differ on whether the government could do more now, if it really wanted to, on freeing up land use restrictions, and allowing land owners to use their own land as they see fit, and as the market encourages them to.

But what is quite clear is that the government is doing nothing at all about cutting back the immigration target. The number of residence approvals that is granted is wholly at the discretion of ministers, and could be changed tomorrow, requiring not a single vote in the House or any support from minor parties. Cutting back the target from the current 40000 to 45000 per annum to, say, 10000 to 15000 would make a great deal of difference to population pressures on the housing market, especially in Auckland. Cutting back immigration isn’t a direct solution to the longer-term issues about dysfunctional over-regulated markets in land use, but it would make a great deal of difference now. And it is not as if the government, or its official advisers, have been able to show any convincing evidence that New Zealand’s large scale inward permanent migration programme is producing any other net economic benefits to New Zealanders.

22 thoughts on “The Government is doing everything it can?”

Totally agree with your comments about denying the obvious, and the “unprecedented level of construction and consenting” does need to be seen in that context. That said, I suspect that the quarterly official data are well behind the curve, and the next few numbers are likely to show very large increases indeed. Sure, it’s anecdotal “economics by walking around”, but here on the North Shore in AKL I’ve been amazed by the recent amount of development, redevelopment and infill building going on. Even oddly shaped scrappets of land that have been left neglected for years are coming on stream. What effect it will have and over what time-frame, I don’t know – It’s early days, and there’s a very big shortage to remedy – but I’d say there is indeed a strong supply response underway

Sorry, Michael but an immigration target of 10000 – 15000 would be wholly taken up with returning citizens and the leakage of approvals for non-citizen graduates of our education system would have to be cut out completely IMHO

“In spite of repeated claims that NZ Super is a “Universal Pension without means or asset testing”, the New Zealander who goes to live in Australia puts his/her entitlement to NZ Super at grave risk. Aussie rules mean that NZ Super suddenly becomes a means tested benefit with the result that many Kiwis loose the lot – neither New Zealand nor Australia will pay them a cent.”

There are 500,000 kiwis in Australia and close to a million in various countries so there could be alot of kiwis returning to NZ if they are not entitled to any retirement income in Australia. Not targetting returning kiwis may not be a option.

As I’ve noted here before, the two numbers are simply not comparable. PLT data measure the status of people as they come across the border, while most residence approvals are given to people who are already here (whether as students, work visas, or whatever). They are simply measuring different things, and it would be almost as misleading if, say, I were to add the “actual permanent residence” and “foreign workers” numbers together and compare them to the residence approvals target (40-45K pa)./

sorry, what is the “big assumption”? If you are referring to the residence approvals being mostly granted to people onshore, it is not contested – the information comes from MBIE, who tout it as a feature not a bug (ie we approve people who already know NZ since they are already living here temporarily).

The big assumption is that those students, tourists and foreign workers who are on shore would eventually choose to migrant and stay. Most I would suggest would not choose to migrant and those who do may not stay for more than a few years before departing.

Anecdotal, when I was at Uni. I had around 15 foreign students that were great mates. Of those 15 only 2 have chosen to migrant to NZ permanently, even though all of whom applied and worked in NZ for 3 to 5 years before departing to start permanent families elsewhere. Only 2 have returned to NZ after 10 to 15 years working overseas.

So the obvious question is what does the trend of residential building consents per population look like? (I guess that would be the new dwelling formation rate – ie; the supply of new dwellings to the stock, or something to that effect.) It wouldn’t take much to show that the new dwelling formation rate is substantially lower than the new HH formation rate – ie: the demographic demand for new dwellings.

I was thinking about this the other day, from an investment perspective, buying an existing dwelling in a currently expensive market becomes a bet on the ability and appetite for the government to seriously address supply constraints. I keep getting told to buy in the Australian market because even though its expensive, the government doesn’t have any serious appetite to correct the current supply constraints. If demand keeps rising, then obviously prices are going to get worse…

Under the Auckland Unitary Plan, practically all mixed housing zones will allow for a 2nd dwelling attached to the main dwelling with a separate kitchen which provides an additional rental income potential.

“Where a dwelling is proposed to be converted into two dwellings each dwelling must have a net internal floor area of at least 40m².
2. The second dwelling must:
a. have direct access to an outdoor living space. This space may be exclusive to the dwelling or shared with the primary dwelling
b. have a common wall with the primary dwelling of no less than 3m in length or share a ceiling and/or floor with the primary dwelling
c. comply with the daylight and minimum dimension of principal living rooms and principal bedrooms development controls.
3. The primary dwelling must exist on the date of notification of this Unitary Plan.
4. Parking is not required for the second dwelling.”

Ryan, there are tons of cranes in Syd/Mel and immigration is falling. Most capital cities are moving into surplus within the next couple of years. A rise in the vacancy rate from 2% to 3% in Perth was enough to trigger capital price falls of 7% QoQ. Do not buy here looking for a quick CG.

Michael. Totally agree with your commentary.
Key is not dumb. He surely understands that the migration rate is the key short term driver of Auckland house prices. What I don’t get is why the Government would be so incompetent not to act on the migration rate.

Because John Key is fully aware that the bulk of people that are arriving through the gates of Auckland International Airport for permanent stay in the last 12 months are kiwis numbering 35k versus actual migrants of 13k.Nothing much you can do when 35,000 kiwis decide to show up in their own country unannounced and unplanned. When there are around 1 million kiwis that reside in various countries around the world, 35k year returning could be viewed as a small number.

DMR, I can’t find the link but there was an interesting article in interest.co.nz saying privately the Cabinet was happy with expensive Auckland houses because their polling told them >50% of their voters liked it that way. Of the top 3 ministers, only Bill English has expressed genuine concern about the welfare/fairness implications of very high house prices. Of course if they got the advice that a temporary reduction in immigration would lead to a rapid adjustment in exchange rate and investment they might change their tune. Perhaps someone should make the case that in an 8-10 reign of government it makes sense to devote a year to experimenting with a lower immigration rate. We would learn a lot.

Wouldn’t surprise me if the polling were right (and I had heard something similar), but if ministers really are following that stuff it is a damning indictment of the lack of any leadership. People have heard so many stories associating falling house prices with recessions, bank failures and worse, that they (not surprisingly) don’t distinguish between falls brought about by liberalisation of land use restrictions, and falls that come in the combination of severe recession/ financial stress that occur when lending standards go so badly wrong, as they did in the US, and in Ireland. Leaders help create alternative narratives.

We will also need to start planning for climate change refugees coming in from the islands that are starting to sink as the ice caps are melting rapidly and rising oceans. So expect rising migrant numbers. Better to plan properly rather than have to behave in a inhumane manner sending pacific islanders packing back to islands that do not have a future.

The art of looking
Comment by Berend de Boer in the same article by Bernard Hickey
I didn’t believe John Key was right when he told us there were houses under $400,000 for sale in Auckland, but lo and behold, he is! The only thing he forgot to mention is that these houses come without land, and are scheduled for removal…